Charcol relaunches Federal Reserve mortgage

This is a tracker mortgage based on the lower US short-term interest rates but without any currency risk whatsoever because all borrowing is in sterling.

The initial rate is 2.99% to 30/09/04, after which the mortgage will track US$ three-month LIBOR plus a margin of 1.25% for 10 years from that date.

US$ three month LIBOR is currently 1.15%, indicating a pay rate of 2.40%, even lower than the initial rate. The tracker rate will be re-set every three months.

Interest on this mortgage is calculated on a daily interest basis, the mortgage is flexible and borrowers can repay penalty free up to 5% of the mortgage per annum and any overpayments can be utilised to allow up to six months payment holidays per year if required.

Ray Boulger, senior technical manager at Charcol, says: “The key aspect to evaluating this mortgage is what the difference is likely to be between short-term US and UK interest rates over the length of the deal. US$ three-month LIBOR has been lower than its UK equivalent for all but one of the last 15 years and it is currently over 3% lower.

“Although the current differential between US and UK rates is likely to reduce over time this deal nevertheless offers exceptional value for borrowers who choose a variable rate and are prepared to accept redemption penalties for 10 years in exchange for a competitive rate.

“Furthermore, such a low starting rate has the added benefit that on repayment mortgages the amount of capital repaid in the early years will be much greater than normal.

“This will be a real benefit when interest rates increase as the outstanding mortgage will be lower. An extra bonus with this mortgage is hat because the rate is so low borrowers will have the option of paying their mortgage back much quicker than usual, simply by paying each month what they would have paid on a normal mortgage. They can either set the mortgage up for a shorter term, use the 5% per annum penalty free overpayment facility, or employ a combination of both.”